Horizon Bancorp Inc

NASDAQ:HBNC

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone, and welcome to the Horizon Bancorp Inc. Conference Call to discuss financial results for the second quarter of 2023. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

Before turning the call over to the management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in the Horizon's current 10-K and later filings. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they can be accessed at the company's website, horizonbank.com.

Representing Horizon today are Chief Executive Officer and President, Thomas Prame; EVP and Chief Financial Officer, Mark Secor; EVP and Chief Commercial Banking Officer, Lynn Kerber; and EVP and Senior Operations Officer, Kathie DeRuiter.

At this time, I would like to turn the call over to Mr. Thomas Prame. Please go ahead, sir.

[Thomas Prame, Chief Executive Officer and President]

Thank you, and good morning, and thank you for participating in Horizon Bancorp's second quarter earnings conference call. Our comments today will follow the investor presentation and our press release that was published yesterday on July 26.

To begin with, we wanted to thank and recognize our communities, our clients and our advisors who have joined us throughout the year, celebrating our 150th anniversary. The history of our organization is based deep in community involvement, our people-first philosophy and a highly engaged and talented team advisors. We have continually displayed a disciplined and balanced operating model that has successfully navigated economic cycles and consistently produced strong total shareholder returns to our investors over time.

As the leadership team will share in our presentation, our second quarter results were positive on many fronts. Our net income improved through solid quarterly revenue, which included a thoughtful approach to new production loan spreads and daily management of our deposit funding costs. These key revenue drivers were coupled with improved non-interest income in the quarter. The team continues to manage expenses very well, and our credit quality performance remains a positive staple for the franchise.

As the industry faced with elevated deposit competition and client demand shifts to higher interest-bearing deposits, Horizon is navigating this environment well with a measured approach to deposit pricing and is continuing to execute on its strategy to accelerate growth in higher yielding assets. Our durable deposit relationships with tenured end market clients, which is managed through our diversified funding platform to retail, commercial and treasury management performed well this quarter by maintaining and slightly increasing our overall deposit balances.

Additionally, today, you'll learn about our forward view of our continued lending growth, the positive results of our pricing strategies, our active balance sheet management and the ample liquidity that we believe positions Horizon well for continued success through 2023 and beyond.

Now to give you a quick summary of our strong core markets across Indiana and Michigan, we remind you that Horizon's expansion and growth has occurred primarily in Michigan and Indiana's college and university towns and within state and county government seats. These markets continue to provide community base that is traditionally more economically stable, which helps limit the real estate volatility of a typically large metropolitan area.

Additionally, we continue to see inbound migration from high cost states and considerable infrastructure investment in our core markets where we have distribution that has resulted in strong balance sheets of our commercial and our consumer customers and aligns well with Horizon's conservative credit culture.

To help communicate and provide insight in our Q2 performance on these fronts, I'm going to turn the call over to Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer, to provide detail on our loan and credit performance for the quarter. Lynn?

[Lynn Kerber]

Thank you very much, Thomas. Good morning. Commercial loan toward the second quarter had a net increase of $820,000 or 1 basis point on an annualized basis. Net fundings were $128 million for the second quarter versus $109 million for the first quarter. These results were impacted by extraordinary payoff in the second quarter and the associated participation loan accounting.

Without these adjustments, commercial loans would have increased $60 million for the quarter, aligning well with our full year growth forecast. The overall commercial pipeline remains solid with $118 million as of June 30 compared to $130 million at the end of the linked quarter.

Our customers continue to evaluate new investment opportunities, and we have seen increased activity across the sector as well as public-private partnership developments. Our new loan originations continue to be very diverse across our markets and consistent with our overall portfolio sectors with roughly one-half in nonowner-occupied CRE, 21% in owner-occupied CRE and 28% in C&I. Consistent with prior periods, our commercial credit quality remains very strong with very low past dues as of June 30 and 1 basis point of net charge-offs in the second quarter of 2023.

Turning to Slide 7, which highlights our overall composition of the commercial portfolio, it has remained very stable. There has been some continued focus on office and retail sectors. And with that in mind, we have highlighted our office and retail portfolios with some additional detail on Slide 8.

You will note that overall, we had $162 million in office CRE, representing 6% of our overall portfolio. The office loan portfolio is well diversified across our markets and comprised of properties in Midwestern cities that have not experienced the same vacancy rates found in some major metropolitan markets.

Our retail CRE portfolios also totaled roughly $160 million, representing 6% of the portfolio and is also well dispersed across our markets. Average loan size for both portfolios was $1.1 million and $777,000 respectively, with both experiencing strong credit quality metrics in both segments with no past dues or nonperforming loans as of June 30.

On Slide 9, we're providing some additional insight on our maturing CRE loans and interest rate repricing risk. For 2023, the remainder of the year, we have $77 million or 4% of our CRE portfolio maturing in the second half of the year. This portfolio currently has an average rate of 6.66% and only $36 million currently has a rate under 6%, representing only 2% of our overall CRE portfolio.

For 2024, there's $178 million in loans maturing, representing 10% of our overall CRE portfolio. This portfolio has an average rate of 6.02% and roughly [halved] (ph) at a rate less than 6%, again, representing only 5% to our overall CRE portfolio. With these metrics in mind, we feel we are well positioned for rate-related credit risk at this time.

On Slide 10, turning to consumer direct loan balances, you'll see that they increased $2 million through origination efforts of our branch platform. We continue to actively increase the new production yields, improving the overall portfolio performance. Indirect auto decreased $25 million for the quarter, which is consistent with our strategic plan of redeploying to higher-yielding product types and with the short duration, this provides flexibility for us in both the balance sheet and revenue goals.

Our credit quality remains consistent in our consumer portfolios with higher quality borrowers with proven credit and income capacity to navigate the higher rate environment. This is reflective of the direct consumer loan portfolio despite net recoveries for the quarter and 10 basis points year-to-date charge-offs for indirect loans.

Slide 11 highlights our mortgage loan performance for the quarter. Our portfolio increased $12 million, which is consistent with expectations for 2023 and reflective of high-quality jumbo loan borrowers. Thus far, for 2023, 70% of our year-to-date production is saleable. As seen with previous quarters, new production yields compare very favorably to those on payoffs and paydowns.

Our team continues to adapt in the current environment and has expanded its core mortgage products and investors to provide additional flexibility and financing options for our highly competitive purchase market and new construction financing. With zero charge-offs for the quarter, our portfolio continues to reflect high-quality borrowers with significant payment capacity and also equity in their homes.

Turning to asset quality metrics. They continue to be very strong, as outlined on Slide 12. Net charge-offs for the second quarter were $274,000, representing 1 basis point of average loans. Our nonperforming loans increased by $2.3 million, primarily due to non-accrual mortgage loans. However, these loans are well collateralized and no loss is expected at this time.

Overall, our nonperforming loan ratio of 52 basis points is consistent with prior quarter's performance, and past dues continue to be very low at 26 basis points of our total loans for the quarter. The allowance for credit loss increased slightly to $49.9 million, representing 1.17% of total gross loans, which we believe is appropriate given the level of charge-offs and nonperforming loans, the condition of our high-quality portfolio and market and economic conditions. Credit quality across all of our lending classes is performing well and reflects our history of consistent and well-balanced approach to lending.

As noted on Slide 13, our historical credit performance compares very favorably to other US commercial banks. We have had a history of outperforming the market through prior economic cycles, and we believe we will outperform the market again as we progress through 2023.

Now I'd like to turn things back to Thomas, and he will provide an overview of our deposit portfolio and trends.

[Thomas Prame, Chief Executive Officer and President]

Thank you, Lynn, and appreciate the great insight and also the extra detail on the commercial portfolio, well done. As we transition to Slide 14 on deposits, we have a very seasoned and granular portfolio. Our key client segments consist of an average of 10 years and balances are reflective of our strategy of helping our local businesses, our consumers and our communities in and around our Michigan markets.

Additionally, as we examine our portfolio, we continue to have over 50% of our balances in transactional checking accounts. Again, these are predominantly tenured operating accounts of our local clients. They're not online generated deposits sourced through high introductory rates but relationships with clients who know and trust Horizon Bank well.

In Q2, our percentage of client balances that were collateralized or assured to the FDIC or third parties increased to 79%. As noted last quarter, in Indiana, public funds with the state, with counties and cities, towns, schools and the like are all insured through the Indiana Public Deposit Insurance Fund to the extent that they exceed federal coverage limits.

As I stated in my opening comments, we're very pleased with our deposit balances, maintaining stability and slightly increasing from Q1. And Mark is going to share in subsequent slides, the cost of maintaining deposit balances was very well managed in the quarter.

Slide 15 provides detail on deposit flows for the second quarter. We remain very upbeat and positive about the strength of our deposit portfolio. Our core relationships consisting of consumer and commercial, shifted slightly as we saw clients spend down some excess funds, and we saw continued movement to higher-yielding deposit products.

During the quarter, the combined consumer and commercial deposit portfolio was just down just over 2%. Throughout Q2, we continued our daily pricing discipline and the team was successfully able to make profitable inroads, adding to our public funds portfolio with rates and turns that align very well with our ALCO strategies. The portfolio grew approximately $120 million, balancing out the consumer and commercial portfolio.

We closed the quarter with fixed rate borrowings up slightly, and these have a positive carry to Fed funds and other funding sources. Additionally, the cash flows from our operations and securities portfolio provided additional liquidity, resulting in a positive Fed funds sold position of over $100 million at the end of the quarter. We believe this will give us additional flexibility in Q3 for asset growth and increase our ability to be nimble with deposit pricing and managing our overall funding costs.

Overall, we're pleased with our Q2 deposit results. The resiliency of our core client base, the active management of our funding costs, the excess cash position will provide additional flexibility in margin management as we move forward. As always, these results are a reflection of our highly engaged team of advisors, connecting our local communities and helping our clients find value in banking with Horizon.

Let me hand the presentation over to Mark Secor, our EVP and Chief Financial Officer, who will walk through our current liquidity position, highlights of our income statement and the key financial metrics of Q2. Mark?

[Mark Secor]

Thank you, Thomas. As Thomas shared previously, our second quarter results were positive on many fronts. Our net income improved through strong quarterly revenue, benefiting from a strategic approach to new loan production spreads and management of our deposit funding costs. These key revenue drivers were coupled with improved core fee income and a continued disciplined operating model in respect to expenses and credit. We accomplished these results while continuing to operate with significant liquidity available as outlined on Slide 16.

Heading into the second quarter, Horizon was well served by our strong liquidity position, which includes the majority of our investment portfolio unpledged. At the end of the second quarter, our liquidity position had improved, including over $100 million of excess cash liquidity, which will allow flexibility in managing our funding needs. Our available secured borrowing lines had over $1.5 billion of immediately accessible liquidity, with additional liquidity through unsecured lines, brokered CDs and additional unpledged securities.

Altogether, these totaled more than $2.8 billion of available liquidity or 50% of total deposits as of June 30. In addition, we continue to be proactive in our balance sheet and management using lower cost term borrowings to drive shareholder value. At the end of the quarter, $1.2 billion of our borrowings were at an average fixed rate of 3.47% with an expected duration of under 1 year.

Slide 17, turning to non-interest income. Improvement over the linked quarter was led by increases in interchange fees and gain on sale of mortgages while most other line items remain consistent. The company is continuing to diversify core fee income categories that align with its relationship banking model. Going forward, we expect our investments in treasury management and private wealth capabilities to contribute additional revenues.

On Slide 18, our efforts to manage our operating expenses continue to be a strength for Horizon. Non-interest expenses were 1.86% of average assets for the quarter compared to 1.79% last quarter. Our long-standing commitment to being agile in this part of our business model and consistently reviewing opportunities to reduce expenses and streamline processes continue to be a priority, and you can expect it to remain our focus throughout 2023.

As we view the second quarter's non-interest expenses, the increase from the linked period was primarily due to annual merit increases, commissions and cyclical benefit costs, along with expenses from elevated loan production and increased FDIC insurance costs. Outside of these items, in the second quarter, core non-interest expense categories have been stable over the last four quarters. We anticipate to return to more normalized run rates in subsequent quarters.

Our loan and deposit pricing management is gaining traction as displayed on Slide 19. The yield on total loans increased 34 basis points in the second quarter compared to the cost of deposits increasing 31 basis points, resulting in a positive spread differential and continuing to add to our net interest income. The results highlight our disciplined loan pricing for new loan production, a greater focus on originating higher yielding loan products, adjustable loans repricing and lower-yielding loan balances being paid down as we continue to focus on loan spread management, production shift into higher-yielding loan products and cash flow reinvestments at higher rates.

The increasing spread is also the result of maintaining a disciplined approach to deposit pricing in a highly competitive market, while ensuring client retention remains strong. The increase in the cost of total deposits in the second quarter was 31 basis points, notably down from the increases in the last two quarters of 43 and 33 basis points. In the current landscape of competitive deposit pricing, we continue to be diligent in our efforts to extend the positive traction we experienced in the second quarter in managing our deposit costs.

Moving to the investment portfolio on Slide 20. The investment portfolio was $2.9 billion at the end of the quarter, a reduction of $63 million in balances from March 31. The portfolio had a book yield of 2.22% and an effective duration of 6.41 years at the end of the quarter. Within the quarter, we opportunistically sold $25 million in securities at a slight gain. Expected cash flows from investments for the remainder of 2023 are estimated to be approximately $60 million, but we will continue to be proactive -- proactively reviewing additional options for security sales over the next several quarters.

Slide 21. Horizon continues to maintain solid regulatory capital ratios well above the requirements to be considered well capitalized. And we believe we have sufficient capital to continue to fund our expected growth in the foreseeable future. We anticipate the growth in capital will outpace growth in total assets during the year, providing for additional capital strength.

On Slide 22. For the third consecutive quarter, our tangible common equity ratio has increased and was up 4 basis points to 6.91%. This is the result of higher retained earnings offsetting a slight increase in the unrealized losses on the AFS investments. Because we have the ability to hold all investments to maturity and pledge for secured borrowings, these unrealized losses are expected to decline over time as investments pay down and mature.

As shown on Slide 23, we continue to maintain a strong cash position at the holding company with adequate cash to cover eight quarters of fixed costs, including the shareholder dividend. This cash position helps provide additional stability in uncertain times and provides flexibility in the future for managing and/or restructuring the bank's balance sheet and the ability to make opportunistic investments such as stock buybacks.

Horizon's current focus for the use of capital is organic growth. As current opportunities and market conditions make M&A less likely, however, we remain open and receptive to the discussions and for profitable new revenue opportunities, both in acquisition and lift-outs. We expect to continue our target dividend payout ratio of 30% to 40%, continuing our 30-plus years of uninterrupted quarterly cash dividends. Based on our current stock price, our dividend provides a higher yield relative to the sector.

Looking ahead on Slide 24, we are providing you with an update on our current expectations for the full year '23 and our progress towards meeting them through the first six months of the year. Our loan growth continues to be solid in both commercial and consumer sectors, which should be a valuable contributor to core earnings in subsequent quarters. For the year, we expect 6% to 8% total loan growth. Our net interest margin and net interest income trends should continue to benefit from our balance sheet and pricing management. And we expect NIM of 2.55% to 2.65% and net interest income of $175 million to $185 million for 2023.

Non-interest income should continue at current levels with the anticipation of additional fee income from our investments in treasury management and wealth. Total 2023 non-interest income is expected to range from $42 million to $45 million. Non-interest expenses continue to be proactively managed across the organization, and specifically in segments of our business impacted by rising rates such as mortgage and consumer lending, and we expect them to remain below the 1.9% of average assets for the year.

Our operating metrics with ROAA and ROAE in the second quarter look to remain consistent for the full year expectation with our TCE ratio anticipated to move upward as rates stabilize and tangible equity increases. For 2023, we expect ROAA of 93 basis points to 97 basis points, ROAE of 10.5% to 10.9% and a TCA -- TCE ratio of more than 7%.

Now I'll turn it back to Thomas for some final comments.

[Thomas Prame, Chief Executive Officer and President]

Thank you, Mark. Appreciate it very much. So why invest in Horizon? Our investment thesis is simple. We are located in very attractive Midwest growth markets. They have a desirable economic environment, significant infrastructure investment and they have flourishing ecosystems for businesses and for communities. Horizon's solid year-to-date loan growth and positive outlook is coupled with a low credit risk profile that has proven to perform favorably compared to other US commercial banks over time. We have demonstrated a track record of consistent underwriting and active portfolio management to ensure the success of our clients and also our shareholders. Horizon has a stable and loyal deposit base, which is expected to continue to deliver benefits over time.

We're seeing the benefits of our active deposit pricing activities and the bank has significant excess liquidity, providing flexibility and nimbleness to our funding strategies. And we have a disciplined operating model, displayed by consistently performing at an expense to average assets of less than 1.9%. This is coupled with our annual net charge-offs of only 1 basis point and a historically low non-performing loans. And lastly, we believe we are a compelling value stock that is supported by our commitment to our dividend with a 6.7 times P/E ratio and a 6.2% dividend yield. Horizon has a track record of 30-plus years of uninterrupted quarterly cash dividends.

We thank you in advance for joining our presentation this morning. This is going to conclude our prepared remarks. So I'm going to ask Marliese to please open up the line for questions. Thank you, Marliese.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Terry McEvoy from Stephens. Please, Terry, go ahead.

[Terry McEvoy, Stephens]

Thanks. Good morning, everyone. Maybe Mark, could you just talk about the puts and takes for hitting the high end or the low end of the margin for the year? And does the margin assume the swap benefit in Q2, which was, what, 5 basis points or 6 basis points?

[Mark Secor]

Yeah. So for the projection we gave, we are including that coming off of the 2.69% margin in June. So that's included in that full year expectation. I think the positives there -- the upsides are -- continue to see the loan repricing at good rates, being able to increase the loan yields. I think as everybody the unknown is what the continued pressure in competition on the deposit funding, it seems to be leveling off here in the short term, but that's probably the issue going into the last half of the year, what that competition is going to look like.

[Terry McEvoy, Stephens]

Thanks, Mark. And Thomas, prior to your arrival at Horizon, the company had reduced branches real estate and really focused on managing expenses. My question for you is what are your thoughts on the expense run rate today? And do you see any longer-term opportunities to improve overall efficiency?

[Thomas Prame, Chief Executive Officer and President]

Thanks, Terry. And good morning. Appreciate the question. When we look at our expenses coming out of Q2, as Mark highlighted, we had some one-time anomalies in there, a little bit of a, I'll say, some production catch-ups from Q1 that got paid in Q2. Our biggest focus right now is really on personnel expense. That's something that we saw a little bit of a merit increase. Our branch distribution, I anticipate that we're going to continue to keep a consistent branch distribution. We hired in last year a very seasoned executive, had experience at larger institutions who is working on a staffing model that's going to change our complement to more universal bankers. And we anticipate as we get into Q3 and Q4, that traction will hold us. We'll see some reduced costs there. Also as a company, we just have a very disciplined operating model being able to tighten our belts and get back within our expense line. So as we look at Q2, moving into Q3, we are anticipating going back to that run rate that you saw somewhere in the mid $35 million versus being over $36 million. Very confident we'll be there as we move into Q3 and Q4.

[Terry McEvoy, Stephens]

Thanks. And then maybe a quick one for Lynn. The increase in non-accruals or non-performing loans, can you just go through what you said on the call? Was that -- were those mortgages that -- were they just adjustable rate mortgages that reset higher and we're now delinquent? I didn't follow you back during the prepared remarks.

[Lynn Kerber]

Yeah. So we had a couple of mortgage loans that moved to non-accrual. These are just some customers that really needed some assistance. And so we don't see those going to foreclosure. They're well within our underwriting guidelines. So we're not concerned with that.

[Terry McEvoy, Stephens]

Great. Thanks for taking my questions.

[Thomas Prame, Chief Executive Officer and President]

Thanks, Terry.

[Operator]

And our next question comes from Damon DelMonte from KBW. Damon, go ahead.

[Damon DelMonte, KBW]

Hey. Good morning, everyone. Hope everybody's doing well today. Just was wondering if you could provide a little bit more color on the outlook for loan growth. The first half of the year was less than 3%. Now that the full year outlook is closer to 6% to 8%. So could you talk about some of the drivers that will kind of get you to your projected range?

[Thomas Prame, Chief Executive Officer and President]

Thank you, Damon. I appreciate the question. I'll give a little bit of color and I'll pass it over to Lynn. As we looked at Q2, we had a little bit of muted loan growth, specifically, as Lynn talked about, again it was the last week of the month, we saw a very large paydowns. And as Lynn said earlier that growth probably for commercial would have been more around the $60 million range than relatively flat. Pipeline still looks strong in that area. On the consumer side, this is moving into our growth season around home equity loans and home equity draws also seeing some nice traction around pipeline management there. So we're feeling that the -- we're going to see how the consumer portfolio also accelerate. From the mortgage warehouse side, we did see a little bit of bump this quarter. We anticipate that we'll see some holiday balances relatively about the same where we are this quarter. And then on mortgage, we are seeing pipelines grow there. We have an attractive portfolio of product for well-yield borrowers on the jumbo side and also some of the portfolio sides on commercial -- on consumer. But let me pass over to Lynn, she can give more insight on the commercial side.

[Lynn Kerber]

Sure. So as I reported in my prepared comments, our pipeline outlook for, as of July 1 is roughly $118 million. This is actually up a little bit from our 30-day forecast 30 days ago. And when I look back over the last year, it's in line with what our quarterly forecast has been. It's moderated a little bit. Certainly, the interest rates, our customers are evaluating their projects and putting a finer point to those. But our overall production has been steady. As I mentioned, our fundings for the second quarter were actually up $128 million over the prior -- versus the prior quarter, which was, I believe, around $118 million. So that's been up. We were impacted in the second quarter by a couple of large pay-offs. Nothing unusual there other than our customers were executing on their business model. We had one that moved a large mortgage to a HUD, and that was their plan. And we had one customer that successfully sold their building as planned. So our overall growth for the second quarter was actually very good, up $60 million on an adjusted basis. So overall, I think we're feeling good about it.

[Thomas Prame, Chief Executive Officer and President]

Thank you, Lynn. Damon, one other point that if you noticed in that portfolio, we're strategically declining the indirect auto portfolio, which I believe, just under $30 million last quarter. We have the capacity and the capability talent within the house also to backfill that transactional portfolio with other assets throughout the quarter.

[Damon DelMonte, KBW]

Got it. Okay. Appreciate all that color. Thank you. And then just to circle back on the margin. The full year guide kind of implies continued compression here in the second half. I guess two questions. One, Mark, what was the spot rate for the month of June on the margin? And two, as you look at the cadence in the back half, do you think it's equally distributed between the two quarters or do you think there's more compression here in the third quarter and then it lightens up in the fourth?

[Mark Secor]

Yeah, Damon. Thanks for the question. Coming out of June, we were getting down more in the 2.5% range. Now those months switched because you've got different fees income and so forth, but we did see -- did see in the mid to lower range of 2.5%. I think we have a handle on the deposit pricing. There's still going to be some pressure. I think that's where we see that and by us giving that guidance that there's going to be some pressure going into the third quarter. And as we -- as we start to get a little more clarity on rates and the potential pausing of the increases, I think we feel like we're going to be able to determine where those deposit pricing is going to end up and be able to manage that. And we said, we have the excess liquidity, and we don't have to chase every rate right now and be able to be a little more strategic in what we're going to be putting on, on the books for funding [indiscernible].

[Damon DelMonte, KBW]

Great. Okay. That's all that I had. Thank you very much.

[Thomas Prame, Chief Executive Officer and President]

Thanks, Damon.

[Operator]

And our next question is coming from David Long from Raymond James. David, please go ahead.

[David Long, Raymond James]

Good morning, everyone, and thanks for taking my question. Sticking with the deposit side, your noninterest-bearing deposit concentration is now just above 20%. In your guidance that you've given for the rest of the year, where does that noninterest-bearing concentration go? And what are the risks that you're off there?

[Thomas Prame, Chief Executive Officer and President]

Thanks for the question. This is Thomas. We anticipate, as we get into Q3, Q4, a slight shift down, not as the magnitude that you saw in Q2. We are seeing clients specifically on the consumer side are spending through some of their savings. We do have a little bit of seasonality that happens with our public funds deposits. I anticipate that we'll see a slight decline, again, probably about 50% of what you saw here in the second quarter. We are seeing, as we talked about before, a little bit more, I call it [indiscernible] or a market pricing in the public funds, which will give us the ability to bring back some of those deposit balances in a more favorable way.

And then also, as we talked about before, our commercial teams, they have very well-heeled balances. We're seeing some good deposit growth there at the beginning of this quarter. And then lastly, we're seeing a bit of a shift from our strategy out in the marketplace, shifting for more of the term deposits from our acquisition strategy moving into money market. So we're anticipating deposits will be slightly down in Q3 and not as aggressive as we saw in Q2. But again, with the excess liquidity of the $100 million, we feel like we'll be able to navigate it and keep our focus really on the margin dollars for the institution and also our margin management on a basis point.

[David Long, Raymond James]

Got it. Thank you, Thomas. And then the other question I had is related to the securities portfolio, and I appreciate the updated stats in the quarter about cash flows coming up and what have you. But it sounds like you sold some during the quarter, a little bit of a gain. Do you see more intense -- a more intense -- or an opportunity to be more aggressive on the portfolio restructuring? Would you take that on and is there -- is there a level of losses you may be able to accept? Just trying to think about an incremental restructuring going on with that portfolio.

[Mark Secor]

Yeah, David. Thanks for the question. We've been looking at that, if any other companies do it where it has some opportunity to be able to sell off, take a loss, help margin. We have -- we've done several models, we're evaluating it. We've internally talked Board ALCO and Board just in the theory of it. So that is a discussion topic. But the issue, I think, as you would see, we're watching the curve right now. There's going to be opportunistic times and so we use that word a lot but we want to watch for those opportunistic times. And if the market moves and gives it to us, we want to be able to move quickly. So that is something that we are looking at and looking at potential use of capital.

[David Long, Raymond James]

Got it. Okay. Thanks for that color, Mark. And then just the last question I had relates to repurchase of your shares. Obviously, pretty inexpensive here. What would it take? What would you have to see to step into the market and repurchase stock?

[Mark Secor]

I think, as we've talked about it, it's a holistic view of use of capital. What's the best opportunity for the use of capital with what the market -- where the market is at. I think currently we've kind of wanted to make sure we're managing TCE ratio to make sure that, that continues to build as we're seeing the unrealized losses come through. But I think as now we're starting to see things stabilize and we've seen over the last several quarters, TCE increasing. I think as we get a clearer picture of rates -- of terminal rates, I think we can look at some of those options. Again, what's the best use of capital? And what -- and then what even mixture of that looks like?

[David Long, Raymond James]

Great. Thank you for -- for the taking my question. Thanks, guys.

[Thomas Prame, Chief Executive Officer and President]

Thanks, David.

[Operator]

And our next question is coming from Brian Martin. [Operator Instructions] Brian from Janney Montgomery. Please go ahead.

[Brian Martin, Janney Montgomery]

Thank you. And thank you. Good morning, everyone. Just a -- maybe one question on the -- on the bond portfolio, not on the bond portfolio, just on the margin just for a moment. Mark, I think just if we do see the margin potentially bottom here in the next quarter or two and if you kind of look into next year, if the forward curve kind of holds and we see these potential rate declines, can you just remind us how the portfolio is positioned there and the margin might perform? And just kind of a big picture look there?

[Mark Secor]

Yeah, and thanks for the question, Brian. Some of it depends on what you're going to model when you're going to potentially see rates coming down and in those -- in a stable environment, we're seeing the margin being able to get stable and improving with that scenario. It also has to play into what are you predicting. And our models, we’re saying that we're going to stay higher longer through the first part of '24. But we do see the ability to recontinue to be able to reprice assets and then control the funding cost and see an improving margin as we get into next year.

[Brian Martin, Janney Montgomery]

Got you. Okay. And that's with the rate cuts probably coming mid-year later is kind of what you're suggesting there?

[Mark Secor]

Yeah, right.

[Brian Martin, Janney Montgomery]

Yeah. Okay. And then just from a standpoint of repricing, how much in the way of loans reprice in the second half of the year and kind of what type of rate are, I guess, just kind of the portfolio rate that we see out there, just what level of opportunity is there here in the next six months on the loan repricing side?

[Mark Secor]

Yeah. On the total asset repricing, which would include a little bit of securities, we talked about the $60 million that would reprice and having the liquid assets. We have about $1.9 billion of assets that would reprice in the next six months. That would include adjustables and then the maturities and paydowns coming from the loan portfolio. So -- and that's compared to $2.3 billion that we have over the next 12 months. So the majority of our repricing happens in the next six months. I think we gave some color and Thomas let me throw back to you to talk a little bit on loan repricing, but we gave some color on some of those of what we're seeing the spreads coming in and the slides for new pricing from what's rolling off and that it's pretty significant.

[Thomas Prame, Chief Executive Officer and President]

Thank you, Mark. And I think you refer back to Lynn’s slides that you had around each one of the sectors and what the incremental lift is. We believe there's a great opportunity for Horizon in this space. As Mark said before, just over $1 billion that we will be repricing. We really showed some great discipline over the last two quarters about our ability to manage our loan spreads and also keep our credit quality. That's been coupled with what we saw in the second quarter about really disciplined deposit management.

Coming out of the second quarter, we're very optimistic about the positive spread differential between our loans -- our assets -- our loans repricing and then our deposit cost in a flat rate environment where the Fed is pausing, we're seeing some strength in the Horizon's balance sheet here. As you said before, it's really about great outlook. Our outlook is going to be, of course, the move yesterday, we're anticipating another move before the end of the year.

And so for us, and as Mark talked about, we're probably looking at a little bit longer in our forecast for '24 rates being held up a little bit longer. That's what's really driving our strategy right now on when to deploy capital as you talked about before, whether it's a share buyback or perhaps restructuring the balance sheet is really being driven by our outlook on where rates are. For us right now, we're taking a little bit of a wait-and-see strategy. We believe that's best for our overall shareholder return.

And as we deploy capital, we have an outlook that we like to make sure that we get the return on that capital for our shareholders back in a very reasonable time. Our objective is to make it in less than 24 months or less, and that extend out to with a rate guessing game of over three years. And so for us, a little bit of patience here in the third quarter. But as Mark said, we're actively looking at this on a daily basis, discussions with the Board already and models have been complete.

[Brian Martin, Janney Montgomery]

Okay. And is that kind of your suggestion on the securities portfolio, Thomas, that the two-year time period as far as payment?

[Thomas Prame, Chief Executive Officer and President]

We think as we look at deploying any capital that we're going to get a reasonable time frame. The securities portfolio for us, you know the dynamics well around the yield and where the duration is and we're on the curve that we would need to see some type of movement in order to get an execution of size. But again, for us, if we're going to execute on something that deals with the securities portfolio outside of our typical opportunistic moments that we take throughout the quarter, again, somewhere between 18, 24 months.

[Brian Martin, Janney Montgomery]

Got you. Okay. And then last one, I think -- I'm not sure who mentioned it. Maybe just a little bit more focused or a little bit on wealth and treasury management. Just is that anything significant that we should be looking at that you're changing there or just you get a little bit more benefit. Is that kind of what you guys highlighted or were kind of detailing?

[Lynn Kerber]

So in the wealth management area, we didn't have any prepared remarks on that today, but I shared in previous earnings calls that we did do some refocusing in our wealth management department over the course of the last year. Part of that is exiting the ESOP business, which was a significant line of business in that group. And we've had some change in leadership and retooling to really focus more on overall wealth management and financial planning and employee benefit programs. We have seen that trend improving over this -- course of this year as far as new pipeline and production of new closed business. So we think that will definitely help us as we continue on throughout this year and going into next year. On the treasury management side, of course, we've been managing to the interest rate environment. So that has impacted the mix of deposits, but our fee income continues to perform really well in meeting our targets.

[Brian Martin, Janney Montgomery]

Got you. Okay. I appreciate the color, and thank you for taking the questions.

[Thomas Prame, Chief Executive Officer and President]

Thanks, Brian.

[Operator]

A question comes now from Nathan Race from Piper Sandler. Nathan, please go ahead.

[Nathan Race, Piper Sandler]

Yes. Hi, everyone. Good morning. Thank you for taking the questions. Just one clarifying question. I think Thomas mentioned that deposit attrition or outflows may continue at least in the third quarter. So just curious how we should think about the level of borrowings going into the back half of the year to kind of stable level of borrowings kind of contemplating that 2.55% to 2.65% guidance on the margin?

[Thomas Prame, Chief Executive Officer and President]

Nathan, thanks for the question. This is Thomas. We would anticipate our borrowings will be relatively flat. Again, we're at Fed funds positive position actually in the quarter. It's going to give us a lot of flexibility around our deposit pricing and also our flows in and out. Again, I anticipate that we'll see a diminished outflows level going into Q3, stabilizing in Q4. But again, with that excess position at the end of the quarter, we feel positive about the overall balances and not really need to increase our borrowings. Also, as I mentioned earlier, a little bit more of a stable market in the public funds area, that enhanced pricing that's now probably agreeable with our outcome models, and that's a space we can step back into that we stepped out of in Q1.

[Nathan Race, Piper Sandler]

Okay, great. That's helpful. And then just maybe one clarifying question on the margin guidance as well. It looked like the accretion income stepped up a little bit in 2Q versus 1Q. I guess, Mark, any thoughts on just the level of accretion that we should expect in 3Q and 4Q of this year?

[Mark Secor]

Yeah. You know it bounced around depending on what we see happen with loans and recovery. But I think the best guidance is to take the first couple of quarters and average them, and that would probably be what we'd see similar to the second half of the year.

[Nathan Race, Piper Sandler]

Okay, got it. And then maybe one last question for Lynn. The reserve was stable quarter over quarter at 1.17% of loans. I guess absent any CECL macro related adjustments, do you expect it to kind of remain near this level as you guys just continue to provide for the loan growth guidance that was provided in the deck?

[Lynn Kerber]

Yeah. Thank you for the question. The CECL model for the allowance always is a combination of a variety of factors, right? And so we have the economic forecast, which is one driver. And then, of course, we have our internal loan balances and credit quality. We did have some excess, I'll call them COVID pandemic reserves that we have been releasing over the course of last year. And so at this point, the key drivers are going to be the overall economy and our overall credit trends. And so to give you a prediction, I don't know that I could do that today, of course, but it's really to be based on those drivers of the overall economy, our loan growth and our credit metrics.

[Nathan Race, Piper Sandler]

Right. Got it. Sounds good. I appreciate the color. Thank you, everyone.

[Thomas Prame, Chief Executive Officer and President]

Thank you.

[Operator]

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Thomas Prame, Chief Executive Officer and President]

Thank you, Marliese. And again, thank you for participating in today's earnings call. As we stated earlier, we're very pleased with the progress through mid-year, and the momentum headed into the second half of 2023. In our view, Horizon's markets are some of the most attractive in the Midwest, and we intend to continue to find positive momentum for our active balance sheet management, our disciplined operating culture, and create long term shareholder value for our well-diversified loan portfolio and our valuable core deposit franchise. We appreciate your participation in today's call, and we look forward to speaking with you on our next quarterly call, which will be in October. Have a wonderful day.

[Operator]

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.